California will give IOUs to local governments, vendors

SACRAMENTO — With the state poised to issue billions in IOUs in lieu of cash this week, California's budget crisis could create serious headaches for some private vendors and local governments.

The deciding factor could be California's banks. If they're willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They'll be able to cash the IOUs.

But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession. One Rocklin company, a temp firm that relies heavily on state business, has already laid off five workers in anticipation of a cash squeeze.

So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang.

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She said banks are probably waiting to see how much interest the state will pay on the IOUs – a figure that won't be decided until Thursday, the same day Chiang is scheduled to issue IOUs. The notes will total $3.36 billion, with about $500 million targeted for the private sector.

Bankers are also scrambling to deal with the logistical issues presented by the IOUs, which haven't been issued by the state since 1992. Among other things, banks are worried about counterfeit IOUs showing up at teller windows, said Beth Mills, spokeswoman for the California Bankers Association.

Overall, the industry appears to have been taken aback by Chiang's announcement last Thursday that IOUs were coming.

"We had been operating under the assumption that the state would have enough money to get through the month of July," Mills said.